Opec’s faltering plan

Has OPEC misled the world over its oil production?

In March 2017, Senior Fellow, Geopolitics of Energy Project at the Belfer Center at Harvard, Leonardo Maugeri published an article stating that the cut in the Organization of the Petroleum Exporting Countries or OPEC’s production will not affect the prices and amount of oil supplied in the market to the degree that the media is reporting it too.

What is current state of the global oil market?

Contrary to popular belief, there is still a surplus of oil in the worldwide market. OPEC’s cutting of production would only solve their depleting revenues if the supply of oil was going down in direct correlation to their restrictions on how many Millions of barrels they produce daily (mbd).

The oil cuts aren’t as drastic as they were made out to be in November 16’ and this coupled with production and production capacity increasing means that the smokescreen of higher oil prices will soon desiccate. The Non-OPEC countries such as the U.S and Brazil increased their oil production in the period after cuts were announced. Supply still greatly outweighs the demand and till the market drains, OPEC will not see the benefits of cutting production.

What should OPEC do?

• First OPEC’s members should stay true to the agreement to cut Oil production. Saudi energy minister Khalid Al-Falih last week at a conference in Houston, stated to fellow ministers from other countries, his frustration over a lack of compliance from the other members. Russia who were supposed to cut oil production with OPEC, recorded a post-Soviet record reaching 11.2 mbd in early 2017.
• Secondly OPEC must realize they cannot return the oil market to the way it was earlier in the decade and that the organization itself has lost the dominion that it once had. The oil cut was purely a psychological supplement to aid the prices and to create a need to buy more in fear of getting less.

Assessment

OPEC’s misguidance of the market will eventually prove to be detrimental to each of the member nations. With other oil producing nations producing large amounts to oil, competition will increase and the oil ‘glut’ will continue.